Key Idea: Economic Independence and Democratic Capitalism

Michael Novak explains that Americans tend to be doers rather than deep thinkers and prolific writers. With a preference for action, American business owners are misunderstood since they rarely stop to explain themselves or spend time with the elites who are writing the business books.

Key Question:

Knowledge of how capitalism works and then courage to find your place in the system.

Q: Why is it important to understand Novak's message? He's a liberal arts guy -- we're in business!

A: If we don't understand the framework of our democratic capitalism, we are poorly positioned for success. People like Michael Novak provide us with tremendous insight to the evolution of the American economy. Understanding the evolution leads to a better understanding of the environment, of how our customers, vendors, and employees think, and of what motivates them. In this ever-shrinking world, whether we like it or not, we are all now operating our businesses in a global economy. You may not sell your product or buy your inventory from outside the USA, but virtually all of us are lodged in a supply chain that extends around the world. We need to understand more of the world in order to operate more effectively and profitably in it.

Someone once said that if you don't keep growing, you'll get ripe and rot.

Read a book, take a course, watch a documentary…it really doesn't matter which media you select. The important thing is that we expand our knowledge and deepen our thinking about the world we live, work and play in.

Think about it

Could teaching the lessons of America's economic success to your employees, friends and family help them appreciate business more fully? Would it help them see beyond their own paychecks? Does understanding Novak more fully make you feel good about going to work everyday?

Clip from: Novak on American Capitalism

Washington, DC: Meet Michael Novak, a man whose life study is of the foundations of government systems that work. And here he discovered small business has the heart and spirit that sustains and nurtures democratic capitalism. Michael Novak strikes deep into the heart of public debate about what works and what doesn't work within economic systems, and he says that small business owners are demonstrators. They're on the front lines, risking and fighting the good fight every day. Small business owners take lofty principles and reduce them to nitty-gritty practice.

As a people, the debate about capitalism should no longer be the domain of economists. We all need to grapple with the first principles of ethics, economics, and government. Virtually overnight globalization is a reality and belief systems are butting against one another, often shredding civility and undermining any inherent ethics and morality.

Each of us needs to engage in the historic debate about economic models. What works? What is good for people? Is this singular focus on "Return to Shareholders" a truncation of capitalism? Do we need to be looking at a more balanced model that includes more than the growth of the bottom line?

American Enterprise Institute

Economic Independence and Democratic Capitalism

HATTIE: (In the Studio) Hi, I'm Hattie Bryant. This series began airing on PBS member stations in 1994 and at that time we just assumed that everybody understood how important entrepreneurs and small business owners are in creating the standard of living we all enjoy today.

We quickly discovered how wrong we were. Yet, it is only recently that we found someone to articulate the deep truth about the prosperity of this nation and the relations between human freedom, government, capital and business.

In every one of our weekly case studies we look at the anatomy of prosperity. And while we have plenty of anecdotal evidence about the real well-springs of value and wealth, we turn to one of America's great thinkers and writers to provide the intellectual context.

You meet Michael Novak, the author of over 25 books translated into most major languages. He holds the George Frederick Jewett chair of religion, philosophy and public policy at the American Enterprise Institute. In 1994 he received the million dollar Templeton prize for progress in religion.

Consider this our primer, an apologetic for democratic capitalism. The bedrock of our economy, the sustainer of our government, and the only proven system that lifts people from poverty to prosperity.

MICHAEL: People still had until 1989 extraordinary expectations about socialism which were clearly, plainly flaws. I said in The Spirit Of Democratic Capitalism, "... the most unreported fact of the 20th Century is the death of socialism." And so a great miracle was wrought here.

We've moved a lot of people out of poverty, but we still have in this hemisphere 200 million who haven't shared in that and we've got to find those new entrepreneurs and we've got to teach the skill. We've got to tell people how valid and important it is; and it's the only hope of the poor

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Join The American Revolution

MICHAEL: Americans tend too much to study the philosophy of socialism and other European ideologies. And they don't study enough the really distinctive philosophy and theology of this most original of all the world's experiments.

(Voiceover) And the one which excited the students in Tiananmen Square who when they were asked, "What are you trying to do?" Built a huge paper mache statue of liberty. And they said, "But you gave it Western eyes, not Chinese eyes." And they said, "That's the liberty we need." They said this is, this is the standard to which the world does repair now. And it's a shame we don't understand it very well.

We've never been very philosophical. We've been pretty good at doing it, but we're not very good at talking about the theory of it. And it's a very profound theory, involving a theory of the economic system, a theory of the political system and above all a theory of the moral, cultural religious system and they all have to work together to make it go right.

HATTIE: So we have to do some reading.

MICHAEL: We have to become philosophically self-conscious. You know, the philosopher Jacques Maritain said, you are like a nation, you know, hiding its light under a bushel. The world has need of your light and you don't, you don't shine it forth. You don't shine it forth. You don't tell us what the secrets of the free society are.
(Voiceover) What is the Novus Ordo Seclorum, the new order of the ages? Our founders worked through seven drafts to come up with that motto on the seal. The drafting committee, Jefferson and Franklin. And for six drafts they had the term virtue, because they thought you can't have a free people unless they have the habit, the virtue, the strength to reflect and to deliberate and therefore to choose well. And then they thought, well the term virtue is so obvious, let's scratch that and they put in Novus Ordo Seclorum,

the new order of the ages, because they were aware of how original their idea was.

There'd never been a republic like this. They had no model they could point to. Not Constantinople, not the Republic of Venice, not the Republic of Sicily or Rome. Our founders understood that if you're going to build a free republic, you have to build it on commerce and industry. And they, of course, trusted best the small.

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Teach Employees How To Own Their Job

MICHAEL NOVAKOur founders understood that if you're going to build a free republic, you have to build it on commerce and industry. And they, of course, trusted best the small.

(Voiceover) And that's the basis from which you get an independent citizenry who can act like sovereigns. Who are masters of their own destiny and who know the world because they're interacting to try and create things in a very tough resistant world. And that -- that's also the group that produces the wealth at the bottom which wells up. The wealth of this country does not trickle down, it wells up from the bottom.

The greatest source of wealth in this country are the small businesses.

Slowly I began to think that maybe also my criticisms of capitalism and business were unreflective. Maybe I had all the biases of a good liberal arts education. I used to put it this way - I love liberal education. It's in my family's blood, the Harvard classics of my father, and the rest. Everybody in my family tries to be everything else and we all come back to the liberal arts. Okay, what are liberal arts? It's about freedom. But what are you free from? And it hit me, the force of a single word, work.

The liberal arts are the non-servile arts. The non-commercial arts. The non-industrial arts. The liberal arts are the arts of aristocrats who live like princes and with white tablecloths and they don't work. They don't get their hands dirty. And they have time for art and poetry and logic and books and the rest of it. And there's a certain raised eyebrow. The poor grubby grind who studies hard and stays up late at night and there's great praise for the more gentlemanly, easy going, don't take it too seriously, pursue ends in themselves. You don't have to worry about the grubby means, because we have servants to do that.

HATTIE: We don't have to worry where our next meal is coming from.

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Give Up Titles And Trappings

MICHAEL: Yeah, and I always sympathize with the servants because that's where my family came from. We were serfs in the Austro-Hungarian empire and I learned people in my family didn't own property until the 1920's and they were only free from serfdom in the 1860's so.

Anyway, I began to think a little bit differently about business and I -- being a part of the left, it was very uncomfortable for me beginning to think positive thoughts about capitalism and I resisted it. I didn't want to tell my wife about it. I certainly didn't want to tell my friends.

HATTIE: You were a closet capitalist. You're a closet capitalist, Michael.

MICHAEL: The first piece I wrote, A Closet Capitalist Confesses, I did, in the Washington Post, 1977; but, I just realized I couldn't be a socialist. I couldn't find an example of socialism anywhere in the world that I admired. And, so I backed into capitalism. I wasn't pro-capitalist, but as I was trying to make up my mind. Am I a socialist, which is what I thought. Am I really a socialist? Do I want America to become more socialist? And I thought no, I don't want that. And so I backed into capitalism by abandoning socialism. If not socialism, then what.

HATTIE: Okay. What is capitalism?

MICHAEL: When I began I didn't know and I looked up in the dictionaries and they all have, I checked seven or eight of them, they all have the following definition. Different words.

(Voiceover) Three characteristics, market system, private property and private accumulation of wealth, the profit motive, as I said.

But after awhile I thought that can't be right. That's what everybody says, but that's not right because that was present in the bible in Jerusalem. Jerusalem was only a marketplace, a market between three continents. There were no smoke stacks. It wasn't a fertile area, it was a desert. All it was is a marketplace. So they had a market. They certainly had private property because the commandment says thou shalt not steal. Which doesn't make any sense unless you have private property. And they certainly had profit because people gave gifts to the temple. And the rich were expected to give more, that means they had profit.

HATTIE: Right. And Jesus talked about the widow's mite.

MICHAEL: But everybody says that's not capitalism because capitalism is something that grew up in the last couple of hundred years after the Protestant reformation.

(Voiceover) Max Weber the famous sociologist wrote a book in 1904, The Protestant Ethic & The Spirit Of Capitalism. What's new in the world is a new sprit. A new attitude toward the creation of wealth, which arose out of the individualism and the asceticism and the sense of hard work, that's a Protestant reformation which took the asceticism out of the monasteries and put it out into the world.

HATTIE: Into the street.

MICHAEL: Into the street. And this is why he argued the Protestant countries do better economically. And why the Catholic countries like Italy and Spain and Portugal, or even France are relatively slower in developing economically.

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See Ownership As Your Calling

HATTIE: You said, "Jews and Christians are central to capitalism." It is one of my questions because you said that, "...it's the religious task of Jews and Christians to change the world as well as to purify their own hearts."

MICHAEL: Correct. Correct, and I've been reinforced on this even the last couple of years. The end of '90's a wonderful book was produced by Professor David Landes who's an economic historian.

(Editor's note: Landes had been Harvard's Coolidge Professor of History and Professor of Economics, now Emeritus, and he is the author of The Wealth and Poverty of Nations: Why Some Are So Rich and Some So Poor).

Look, I'm just a poor theologian, I'm not a historian or an economist. But he (Landes) wants to find out why economic development went so far in Europe and America when in some ways it started earlier in China and China developed up to a point and then stopped. And so with other countries. He compares cultures. Why, and he discovers it's -- he's not a religious person he says -- but he discovered it's religious as much as anything. That the biblical messages, that God is not part of the earth, that God is separate from the earth is important because then you don't treat the earth as sort of God's body. But you realize that God wants you to do things.

And secondly there's a notion of Judaism and Christianity that there's progress and decline and it's the vocation of Jews and Christians to build up the Kingdom of God. To be ready for the coming of the Messiah, for Jews. And for Christians, believing that the Messiah has come to make ready for the second coming and to make a world of greater justice and love and truth to the best of our ability.

HATTIE: Which requires action and doing --

MICHAEL: Exactly.

HATTIE: -- and getting up every day and trying.

MICHAEL: And millions of people doing that. Millions of people getting up every day and trying to change the world, at least a little bit in their little part. That's not universal among religions, but you do find it wherever there are Jews and Christians.

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Play By The Rules

HATTIE: You gave us your encyclopedia definition of capitalism, but what about democratic capitalism?

MICHAEL: Well, I want to say a word about democracy and about capitalism. It struck me that in the United States, long before the Catholic church or other churches talked about it, there was the Sherman Antitrust Trust Act, 1890, which was an attempt to control monopolies.

In other words, we always had the sense that the economy shouldn't just grow wild. There should be -- it should be within a framework of law.

So in the United States we've always thought from the beginning, without being socialist, that there's a role for government and there's a role for law and only within that context can capitalism develop. That's why I speak about democratic capitalism. You even need the external law and you need the habits in people that if they say they're going to do a good day's work, you can trust them to do a good day's work. If you have a manager who's seven miles away who said we did thus and so, you can believe him. And by goodness if you don't believe him you fire him, because we depend on honesty.

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Work Long Hours

HATTIE: What is moral capital?

MICHAEL: Moral capital is that fund of habits that has settled dispositions people, tendencies of people, capacities of people to work hard, work honestly, to be inventive, to be entrepreneurial, to be willing to take risks. That fund of habits is a kind of capital that economists didn't notice for a long time.

(Voiceover) They call it human capital. How much is it worth in strict economic terms to the Japanese that they have such good families who teach such good discipline and such good habits of learning, and such good habits of high quality work and a willingness to work long and hard.

It's worth a lot. Japan has almost no resources, but it's a rich country. It's rich mostly because of human capital, not material. Brazil may be the richest country on earth for resources, natural resources. It's got probably more of everything than anywhere else on earth. But it's a relatively undeveloped country. More than half the people have a third grade education or less. And so -- so economists know that moral habits are a form of wealth. They have many other good things, but they are also even -- they even have an economic reality, and they're a form of democracy because without certain habits you can't make the law work. If people don't tell the truth, if they lie and cheat, you can't trust the courts.

HATTIE: Right.

MICHAEL: Both democracy and capitalism depend on more -- I say the free society has three legs to it, three parts to it.

There's a political part of law and rights.

There's an economic part of freeing people from poverty, growth and development.

And there's a moral and cultural part which is the habits, of knowing the point of the whole thing. Treating one another as brother, sister, as community. And working for justice and truth and liberty and love and so forth. And, all those three parts have to be developed. If any one weakens, the other two also weaken.

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Build Your Business As A Three-Legged Stool

HATTIE: (In the Studio) We talk about our economic system so little. Michael Novak says that democratic capitalism can be thought of as a three legged stool.

One leg is the rule of law. Democracy, the government, public servants. I like to think of them as referee's. they have on the black and white shirts and they're running up and down the field trying to make sure the bad guys are corrected or thrown out of the game. As a business owner, I feel that sometimes some are bureaucrats who are heavy handed, controlling, demanding and sometimes downright irritating. But we do need them.

The second leg of the stool is a market economy based on private ownership of land and businesses.

In his book, The Spirit of Democratic Capitalism, Novak says:
(Voiceover) 'The new capitalism is not a matter of adventure or privacy but of continuous enterprise, planned and organized. Evaluated for profit and loss.'

And this is the key point: 'The invention of the market economy in Great Britain and the United States, more profoundly revolutionized the world between 1800 and the present more than any other single force. After five millennia of blundering, human beings finally figured out how wealth may be produced in a sustained systematic way.'

The third leg of the stool is morality. Novak says that truth, fair play, trust and respect for others are key. We think this is the least understood and the most important of the three. There is confusion. Novak is saying that business people have to be moral to succeed. Historically we've been seen by the elites, academics, journalists, and bureaucrats as greedy and self-serving. And of recent, too much of business has been just that.

Next, Michael Novak explains that there is a difference between greed and self-interest.

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Do What Interests You

HATTIE: Just talk about the difference in those terms, that self-interest is good, greed and selfishness is bad. What is the difference?

MICHAEL: I think the early economic thinkers made a bad mistake when they talked about the motivating intelligent business is self-interest, and I think they had a mischievous intention.

I think they chose it where that they knew would drive the theologians and the moralists crazy. Because for moralists and theologians self-interest is normally a negative term. It means selfish. What they meant -- what the economists were trying to be scientists and they meant to say the term self-interest in a neutral way. They meant to say whatever it is that you value most, that's your self-interest and that's how you define yourself.

HATTIE: Right.

MICHAEL: So, you know, business has inherent in it a drive in its own success. It may not be a generous motive, but just to succeed at it you've got to serve others well. Whether you like it or not. You've got to do that well. And so, even if you have a lousy personality, business forces you to be better than you are.

(Voiceover - an excerpt from a prior episode)

Brian Jacobsen: Do you think that's something we should do?

Glen Beily: I think so.

MICHAEL: (Voiceover) I mean the self is not developed until it's joined with at least one other and usually more than one other. And that's just the law of life. In a community, the other law of life is, a community which represses its selves, which represses its individuals is not a good community. So a community needs for its individuals to flourish, and for individuals to flourish they need the community.

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Be The Adult In The Room

HATTIE: But is capitalism good for the soul?

MICHAEL: Well, it's not the whole answer for what the soul needs. Man does not live by bread alone to quote a line, but it is good for the soul compared to the alternatives. When you introduce a capitalist economic order into a traditional order or into a socialist order, it stretches people.

It demands more of them. It took a long time to learn what markets do and how well they do it and to begin to get a philosophy, a theory of trusting markets.

Markets don't do everything. You don't want to buy and sell the truth. You don't want to buy and sell integrity. You don't want to buy and sell moral habits. You don't want to buy and sell your own body or anybody else's body, and so on. So, I don't want to suggest markets are good for everything. But in certain limits, markets are a terrific device for social intelligence. The most intelligent way to organize a society fairly that there is. And have their faults, but it took time to learn that on balance they're a lot fairer, a lot more inventive and intelligent than other models.

And so with private property. People regularly think it'd be better if we owned everything in common. The problem always arises who will stay up at night with the sick cow. One woman told me that was the problem of communism, the collective. Who would stay up at night -- if it's your cow you will. If it's your only cow. But, if it's the collective, you know the other fellow will, Boris will, or Yvonne will. And then nobody will.

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Invent The Future

MICHAEL: When I realized that the dictionary definitions were wrong, I had to think well what is correct. And I thought what's really new about the world, Lincoln caught better in an address.

He gave a wonderful talk on the six great moments in the history of liberty. Started with Adam and Eve. And one of the moments, which really surprised me, was the patent and copyright act. And he says that was so brilliant.

And I'm going to say it in my own words, but his words are eloquent. But in my own words it was that for the first time in history, the main form of wealth will not be land, as it had been -- even in the Homestead Act, 70 acres -- but the intelligence, the ideas, the insights that led people to treat their land or anything else in a new way.

The main cause of wealth would be the head. I like to say caput. The root term for capital - the discovery, invention.

Lincoln talks about how the man who discovers a new strain of seed for grass and develops a kind of grass that is richer and better and more nourishing than other types, can improve somebody's crop six fold or eight fold, and that new wealth sprang from the mind. And therefore the earth is much richer than we think it is because God gave us minds to improve.

God invited human beings to take part in his own creation. To be co-creators with God and bring out of the earth things that lie fallow and hidden there.

(Voiceover) Ideas matter more than ever before and it's astonishing how many things are born in someone's mind and something comes to be that was never there.

Ideas are really very, very powerful. And if you think about it ... that's what capitalism is. It's the first system organized around the mind, around invention and discovery.

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Be All You Can Be

HATTIE: (Voiceover) Why should someone start a business.

MICHAEL: It's very good for democracy, because a democracy will work best, the greater the number of independent owners that there are. That's where sovereignty resides.

And if we all work for big organizations and huge businesses, we're much more likely to think in a collective, bureaucratic way and lose that sense of independence that Jefferson and others saw were so vital for the life of a republic.

And finally, building your own businesses teaches a set of virtues which you just won't learn any other way.

(Voiceover) It teaches you to live with failure, because there's going to be lots of failures. It teaches you to do very difficult things and it gives you a great many satisfaction to seeing something that you, that existed only in your imagination, come to life and reality.

I think that's the most important institutional change to be happening in the world. The promotion and the multiplication of small business. It's the only hope of the poor. And it's the best hope of democracy.

So I see two main strategic reasons for small business. It's the main strength of democracy, and it's the main instrument of raising up the poor, providing jobs.

(Voiceover) Small business is the most important institution of civil society. The backbone out of which democracy comes. That sense of leadership, and strength and self-confidence that makes citizens willing to take on their government and become responsible for it. To become the sovereigns.

HATTIE: Thanks Michael Novak for setting us straight. Democratic capitalism is good. It has made life better for millions and will continue to do so. Yes, it is not a perfect system, but each of us can help make it better.